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Retail Bankruptcies Raise Collection Questions for Landlords Kevin Newman, Nic Ferland, and Scott Fleischer Barclay Damon LLP
Anyone can read the provisions of the federal Bankruptcy Code that apply most often in a retail bankruptcy case. For landlords, however, it’s not that simple when their tenant is now a debtor (the party filing a bankruptcy case) and they are left wondering what they can (and cannot) collect. Many of the most important concepts in retail bankruptcies are colored by interpretations of the Bankruptcy Code and play out differently depending on where a bankruptcy case is filed. There are two approaches taken by bankruptcy courts around the country when it comes to interpreting the Bankruptcy Code’s collection-related provisions for commercial landlords. They are “performance date,” where collection depends on when the charge came due, and “proration,” where collection depends on when the charge accrued. These inconsistent approaches may have a dramatic impact on what a landlord can collect from its bankrupt tenant. When a retailer files a bankruptcy case, landlords must immediately assess the law in the court where the case is pending. Two popular venues for such cases are
Delaware (which utilizes the performance date method) and Virginia (which utilizes the proration method). When it comes to assessing the collection of lease charges, the focus is on the period following the filing of the bankruptcy through the date the retailer determines what it intends to do with the lease. The Bankruptcy Code provides that, generally, debtors must “timely perform” their commercial lease obligations from the bankruptcy filing through the date a decision is made on the treatment of the lease (with a notable exception discussed below). If a charge under the lease is considered a post-bankruptcy obligation, the debtor must timely perform—but this determination differs by approach and touches on many bankruptcy concepts. AUTOMATIC STAY The Bankruptcy Code generally prohibits attempting to collect a pre-bankruptcy debt or seeking to obtain possession of the debtor’s property (including the debtor’s interests in its unexpired leases) and imposes penalties for violations. It is essential to know which charges
are considered post-bankruptcy obligations that must be paid, and which are considered pre-bankruptcy charges that cannot be sought from the debtor. Therefore, having a proper understanding of the approach utilized where the bankruptcy case is pending is critical to understand what can and cannot be collected. STUB RENT One of the most talked about concepts in retail bankruptcies is “stub rent,” the rent and related monthly charges calculated on a pro-rated basis from the date the case is filed through the end of that month. Under the proration method, stub rent is a post-bankruptcy obligation that must be timely performed under the lease, as it accrued post-bankruptcy. Under the performance date method, however, stub rent is not considered a post-bankruptcy obligation because the rent for that month was most likely payable in full on the first of the month, prior to the bankruptcy filing. However, as long as the debtor was occupying the premises as of the day they filed for bankruptcy, landlords often assert that stub rent must be paid to